<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q SB
(MARK ONE)
/S/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-29280
HAWAIIAN NATURAL WATER COMPANY, INC.
{Exact name of small business issuer as specified in its charter}
HAWAII 99-0314848
(State or jurisdiction of incorporation I.R.S. Employer
or organization) Identification Number)
248 Mokauea Street
Honolulu, Hawaii 96819
(Address of principal executive offices)
(808) 832-4550
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
The issuer had issued and outstanding 3,999,212 shares of Common Stock
on August 7, 1998.
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
Hawaiian Natural Water Company, Inc.
Balance Sheet
June 30, 1998
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,109,362
Inventories 346,603
Trade accounts receivable, net of allowance for doubtful
accounts of $10,626 311,431
Other current assets 149,921
------------
Total Current Assets 1,917,317
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $306,135 1,876,398
------------
Total Assets $ 3,793,715
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 270,143
Accrued payroll and related 77,372
Accrued other 104,223
Notes payable - Current portion 94,857
Capital lease obligation - Current portion 44,563
------------
Total Current Liabilities 591,158
NON-CURRENT LIABILITIES
Notes payable - net of current portion 468,815
Capital lease obligation - net of current portion 24,850
------------
Total Non-Current Liabilities 493,665
Total Liabilities 1,084,823
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value; 5,000,000 shares
authorized; none issued and outstanding --
Common stock, no par value; 20,000,000 shares authorized;
3,899,212 shares issued and oustanding 6,338,728
Common stock warrants and options, 3,213,310 issued
and outstanding 2,053,916
Accumulated Deficit (5,683,752)
------------
Total Stockholders' Equity 2,708,892
Total Liabilities and Stockholders' Equity $ 3,793,715
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Operations
For the Three and Six Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30
------------------------- --------------------------
1997 1998 1997 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 283,309 $ 477,005 $ 499,993 $ 876,608
COST OF SALES 330,780 407,024 542,716 800,073
---------- ---------- ----------- -----------
Gross Margin (47,471) 69,981 (42,723) 76,535
EXPENSES:
Selling and Marketing 189,187 269,486 275,971 511,966
General and Administrative 215,427 305,114 370,173 615,873
---------- ---------- ----------- -----------
404,614 574,600 646,144 1,127,839
OTHER INCOME (EXPENSE)
Interest expense (178,279) (24,528) (414,474) (50,012)
Interest and other income 15,249 18,739 16,278 46,849
---------- ---------- ----------- -----------
(163,030) (5,789) (398,196) (3,163)
Net Loss Before Extraordinary Item (615,115) (510,408) (1,087,063) (1,054,467)
Extraordinary Item -
Loss on Extinquishment of Debt (268,810) -- (268,810) --
---------- ---------- ----------- -----------
Net Loss $ (883,925) $ (510,408) $(1,355,873) $(1,054,467)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Basic and Diluted
Net Loss Per Share:
Before Extraordinary Item $ (0.23) $ (0.13) $ (0.51) $ (0.27)
Extraordinary Item $ (0.10) -- $ (0.12) $ --
Net Loss Per Share: $ (0.33) $ (0.13) $ (0.63) $ (0.27)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted Average Common and
Common Equivalent Shares Outstanding 2,709,212 3,899,212 2,154,212 3,899,212
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Hawaiian Natural Water Company, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1997 1998
------------- ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (1,355,873) $ (1,054,467)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 31,786 105,233
Amortization of loan discount and deferred costs 235,000 44,825
Extraordinary loss on extinquishment of debt 268,810 --
Issuance of stock options to consultants and distributors -- 53,370
Net increase in current assets (141,339) (248,402)
Net (decrease) increase in current liabilities (104,647) 29,895
------------- -------------
Net cash used in operating activities (1,066,263) (1,069,546)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,479) (183,898)
Purchase of short-term investment (3,000,000) --
------------- ------------
Net cash used in investing activities (3,010,479) (183,898)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering of common stock 7,942,312 --
Payments for services related to the initial public offering (168,364) --
Proceeds from notes payable 189,242 --
Repayments of notes payable (2,458,467) (84,818)
Repayment of principal on capital leases (18,490) (23,738)
------------- ------------
Net cash provided by (used in) financing activities 5,486,233 (108,556)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,409,491 (1,362,000)
CASH AND CASH EQUIVALENTS, beginning of period 89,335 2,471,362
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,498,826 $ 1,109,362
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
Hawaiian Natural Water Company, Inc.
Statement of Stockholders' Equity
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Warrants
and
Common Stock Options
------------------------ ------------------------ Total
Number of Number of Accumulated Stockholders
Shares Amount Shares Amount Deficit Equity
--------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 3,899,212 $6,338,728 3,170,310 $2,000,546 $ (4,629,285) $ 3,709,989
Issuance of stock options
to consultants and distributors -- -- 43,000 53,370 - 53,370
Net Loss -- -- -- -- (1,054,467) (1,054,467)
--------- ---------- --------- ---------- ------------- -------------
BALANCE AT
JUNE 30, 1998 3,899,212 $6,338,728 3,213,310 $2,053,916 $ (5,683,752) $ 2,708,892
--------- ---------- --------- ---------- ------------- -------------
--------- ---------- --------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. GENERAL
The accompanying unaudited financial statements of Hawaiian Natural Water
Company, Inc. (the "Company") should be read in conjunction with the audited
financial statements for the year ended December 31, 1997 and notes thereto
filed with the Securities and Exchange Commission in the Company's Annual
Report on Form 10-KSB. In the opinion of management, the accompanying
financial statements reflect all adjustments considered necessary to fairly
present the financial position of the Company at June 30, 1998, the results
of its operations for each of the three and six month periods ended June 30,
1997 and 1998, and the cash flows for the six month periods ended June 30,
1997 and 1998, in accordance with generally accepted accounting principles
and the rules and regulations of the Securities and Exchange Commission. The
results of operations for interim periods are not necessarily indicative of
results to be achieved for full fiscal years. Certain amounts from prior
periods have been reclassified to conform to current period presentation.
As shown in the accompanying financial statements, the Company has incurred
significant losses since inception. Management expects that the Company will
continue to incur additional losses until the Company achieves significantly
higher levels of sales. The Company is continuing to develop its strategic
plan and related marketing strategies, which would allow for the improvement
of sales and cash flow. However, in order for the Company to achieve
profitability, it will need to improve revenues. In order to sustain
operations, the Company must obtain additional financing.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION. The Company recognizes revenue on the accrual method of
accounting when title to product transfers to the buyer (generally upon
shipment). The Company's policy is to provide a reserve for estimated
uncollectible accounts receivable, if any.
RESERVE FOR RETURNS. The Company grants customers the right to return goods
which are defective or otherwise unsuitable for sale. The Company replaces
returned goods or issues a refund to the customer. The Company's policy is
to provide a reserve for estimated returns and related disposal costs.
<PAGE>
GROSS MARGIN. The Company's plant currently has a normal maximum production
capacity of approximately 800,000 cases per year. The Company is currently
operating its plant at approximately 30 percent of this capacity.
2. LOSS PER SHARE
Basic and Diluted Loss Per Share is computed by dividing the Net Loss by the
Weighted Average Common and Common Equivalent Shares Outstanding during the
period. The Weighted Average Common and Common Equivalent Shares Outstanding
during the three and six month periods ended June 30, 1998 was 3,899,212
compared to 2,709,212 and 2,154,212 during the three and six month periods
ended June 30, 1997, respectively.
The Company's basic and diluted losses per share are the same for the second
quarter and first half of both 1997 and 1998 in that any exercise of stock
options or warrants would have been anti-dilutive.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include savings accounts and investments in a money
market account with original maturities less than 90 days.
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. As of June 30, 1998, inventories were comprised of the following:
<TABLE>
<S> <C>
Raw materials $235,701
Finished goods 110,902
------------
$346,603
------------
</TABLE>
5. NOTES PAYABLE
As discussed in Note 3 to the audited financial statements contained in the
Company's Annual Report on Form 10-KSB, in September 1997, the Company
acquired certain bottle making equipment used in its bottling operations. The
consideration for the equipment was an aggregate of $1.2 million, a portion
of which was paid through the issuance of a promissory note in the original
principal amount of $825,000, payable in installments, as defined. The
Company has discounted this equipment note payable using an estimated
weighted average cost of capital of 12%, and amortizes the resulting discount
to interest expense using the effective interest method over the term of the
loan.
Additionally, the Company has a $16,654 installment note payable for the
purchase of a vehicle.
<PAGE>
The following summarizes the notes payable as of June 30, 1998:
<TABLE>
<S> <C>
Equipment note payable $ 701,250
Less: Unamortized discount (154,232)
---------
Net equipment note payable 547,018
Vehicle installment note payable 16,654
----------
Subtotal - notes payable 563,672
Less: Current portion (94,857)
----------
Non-current portion $468,815
----------
----------
</TABLE>
At December 31, 1997, the equipment note payable was carried in the Company's
accounting records as a note payable to a related party, because at that time
an executive officer of the equipment note lender was a director of the
Company. On March 31, 1998, this officer resigned as a director of the
Company.
6. STOCK OPTIONS
The total number of Common Stock warrants and options shown at June 30, 1998
excludes an aggregate of 426,575 options outstanding at such date held by
officers and employees of the Company.
The Company accounts for stock options granted to non-employees in accordance
with Statement of Financial Accounting Standards No. 123 (SFAS 123)
"Accounting for Stock-Based Compensation," which requires that these
transactions be accounted for based upon the fair value of consideration
received or the fair value of the equity instruments issued, whichever is
more reliably determinable. In the first quarter of 1998, the Company
recorded $53,370 for options granted to certain consultants and distributors.
No additional options were granted to non-employees in the second quarter of
1998.
In February 1998, the Company granted an aggregate of 202,500 options to
certain officers and employees at an exercise price of $4 per share, (subject
to adjustments under certain circumstances). These options vest over a
three-year period. In May 1998, 30,000 of these options were forfeited upon
resignation of an employee. Stock options granted to employees are accounted
for under APB Opinion No. 25, under which compensation expense is recognized
only if the exercise price is less than the market price at the date of grant.
The exercise price of all of the foregoing options was higher than the market
price of the Common Stock at the date of grant.
<PAGE>
7. SALES BY GEOGRAPHIC REGION
The Company sells its product directly to certain foreign distributors. All
sales are made in U.S. dollars. For the three-month periods ended June 30,
1997 and 1998, the Company had the following sales by geographic region:
<TABLE>
<CAPTION>
1997 % 1998 %
--------- --- -------- ---
<S> <C> <C> <C> <C>
Hawaii $183,395 65 $305,771 64
U. S. Mainland 52,086 18 42,191 9
International 47,828 17 129,043 27
-------- --- -------- ---
$283,309 100 $477,005 100
-------- --- -------- ---
</TABLE>
For the six month periods ended June 30, 1997 and 1998, the Company had the
following sales by geographic region:
<TABLE>
<CAPTION>
1997 % 1998 %
--------- --- -------- ---
<S> <C> <C> <C> <C>
Hawaii $342,647 69 $581,188 66
U. S. Mainland 93,890 18 129,813 15
International 63,456 13 165,607 19
-------- --- -------- ---
$499,993 100 $876,608 100
-------- --- -------- ---
</TABLE>
8. SUBSEQUENT EVENT
On July 31, 1998, the Company engaged 8607 Colonial Group, Inc. ("Colonial")
as its financial public relations advisor for a two-year term. As
compensation for its services, the Company agreed to issue to Colonial
100,000 shares of Common Stock (the "Initial Shares"), plus options (the
"Colonial Options") to purchase an aggregate of 565,000 additional shares at
exercise prices ranging from $2.50 to $6.00 per share. The options are
exercisable over staggered terms commencing September 1, 1998, and ending
July 15, 2000. The options are redeemable by the Company at $.05 per option
if the trading price (as defined) of the Common Stock exceeds 150% of the
exercise price of the options to be redeemed for a period of 10 consecutive
trading days. If Colonial exercises all of the first 300,000 options, the
Company will issue to Colonial an additional 50,000 shares of common stock
(the "Contingent Shares"). The Company has agreed to register the shares
issued or issuable upon exercise of the options under the Securities Act of
1933, as amended.
The Company believes that the fair market value of the Initial Shares was
approximately $350,000, determined on the date of issuance. The Company
believes that the fair value of the Colonial Options was approximately
$773,000 determined on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: risk-free
interest rate of 5.42%; expected dividend yield of zero; expected life of
nine months; and expected volatility of 126%. The aggregate fair market value
of the Initial Shares and the Colonial Options will be recorded as a charge
to income in the Third Quarter of 1998. The fair market value of the
Contingent Shares will be recorded as a charge to income upon issuance.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
THE FOLLOWING DISCUSSION MAY BE DEEMED TO CONTAIN CERTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AS INDICATED BY THE USE OF SUCH TERMS AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ESTIMATE," "ANTICIPATE," "INTEND" OR
OTHER SIMILAR TERMS OR THE NEGATIVE OF SUCH TERMS. FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN MAY INCLUDE, WITHOUT LIMITATION, STATEMENTS
CONCERNING: (I) ANTICIPATED CHANGES IN REVENUE, COST OF MATERIALS, EXPENSE
ITEMS, INCOME OR LOSS, EARNINGS OR LOSS PER SHARE, CAPITAL EXPENDITURES,
CAPITAL STRUCTURE AND OTHER FINANCIAL ITEMS; (II) PLANS OR PROPOSALS OF THE
COMPANY OR ITS MANAGEMENT WITH RESPECT TO THE COMPANY'S GROWTH STRATEGY,
INTRODUCTION OF NEW PRODUCTS, AND POSSIBLE ACQUISITIONS OF ASSETS OR
BUSINESSES; (III) POSSIBLE ACTIONS BY CUSTOMERS, SUPPLIERS, COMPETITORS OR
REGULATORY AUTHORITIES; AND (IV) ASSUMPTIONSL UNDERLYING THE FOREGOING.
THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON THE COMPANY'S CURRENT
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING WITHOUT LIMITATION, RISKS AND UNCERTAINTIES RELATING TO: (I) THE
MARKET FOR THE COMPANY'S PRODUCTS; (II) THE MAINTENANCE AND DEVELOPMENT OF
THE COMPANY'S DISTRIBUTOR NETWORK; (III) POSSIBLE CHANGES IN THE COMPANY'S
BUSINESS STRATEGY OR THE EXECUTION OF ITS EXISTING STRATEGY; (IV) THE
COMPANY'S COST OF MATERIALS OR SOURCES OF SUPPLY; (V) THE COMPANY'S NEED FOR
ADDITIONAL CAPITAL OR, IF NEEDED, THE AVAILABILITY OF ADDITIONAL CAPITAL ON
ACCEPTABLE TERMS AND CONDITIONS; (VI) THE COMPANY'S ABILITY TO ATTRACT AND
RETAIN KEY PERSONNEL; (VII) REGULATORY ISSUES IN THE U.S. OR ABROAD; AND
(VIII) THE COMPETITIVE ENVIRONMENT IN THE COMPANY'S INDUSTRY. MANY OF THESE
RISKS AND UNCERTAINTIES ARE BEYOND THE COMPANY'S ABILITY TO PREDICT OR
CONTROL. SHOULD MANAGEMENT'S OPERATING ASSUMPTIONS PROVE INCORRECT, THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THESE FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED HEREWITH AND THE NOTES THERETO.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
Net Sales. Net Sales increased 68% to approximately $477,000 for the
three months ended June 30, 1998 (the "1998 Quarter") from approximately
$283,000 for the three months ended June 30, 1997 (the "1997 Quarter"). The
increase in net revenues in the 1998 Quarter was due primarily to unit sales
growth from approximately 41,000 cases
<PAGE>
in the 1997 Quarter to approximately 71,000 cases in the 1998 Quarter. The
average sales price per case decreased approximately 4% in the 1998 Quarter
compared to the 1997 Quarter due to discounts and promotional allowances
granted to promote sales. Sales in the Hawaiian market accounted for
approximately 64% of sales in the 1998 Quarter compared to 65% in the 1997
Quarter. International sales accounted for approximately 27% of sales in the
1998 Quarter compared to approximately 17% in the 1997 Quarter. In the 1998
Quarter, the Company made its first major shipment to Japan. The Company
currently has three distributors in Japan and expects significant sales
growth in that market. Sales to Guam also increased significantly over the
prior year and are expected to increase further during the second half of
1998. The Company expects continued growth in International sales,
especially in the Pacific Rim, through increased penetration of existing
markets and entrance into new markets, such as Thailand and Taiwan. Sales to
the U.S. Mainland decreased to 9% of sales in the 1998 Quarter compared to
18% in the 1997 Quarter. In May 1998, the Company terminated its exclusive
distribution agreement with William Wright covering most of the Western U.S.
due to his failure to meet certain minimum purchase requirement. In August
1998, the Company received a lump sum payment of $100,000 in connection with
this termination. Mainland sales are currently directed primarily into
Seattle, Santa Barbara and Kansas City, and to a limited extent into Las
Vegas and the Los Angeles area. The Company is currently pursuing a niche
marketing strategy on the U.S. Mainland, primarily directed toward the health
and fitness markets.
Cost of Sales. The Company's cost of sales increased 23% to
approximately $407,000 in the 1998 Quarter from approximately $331,000 in the
1997 Quarter, primarily due to unit sales growth. However, the average cost
per case sold decreased approximately 30% in the 1998 Quarter. The primary
raw material cost component in Cost of Sales is the cost of the bottle. That
cost was substantially reduced in the 1998 Quarter compared to the 1997
Quarter, as a result of the Company's purchase of the blow molding equipment
used to manufacture its bottles. (See Note 5 to the Financial Statements)
Bottling costs were also reduced through the installation of new equipment
used to further automate the Company's bottling line. The Company is
currently implementing additional improvements to its bottling line, which
should further reduce its bottling costs in the second half of 1998.
Gross Margin. Gross margin increased to approximately $70,000 in the
1998 Quarter from approximately ($47,000) in the 1997 Quarter, primarily as a
result of the decrease in the Company's bottling costs described above under
"Cost of Sales."
Expenses. Selling and marketing expenses increased 42% to approximately
$269,000 in the 1998 Quarter from approximately $189,000 in the 1997 Quarter.
The majority of this increase is attributable to an expanded sales staff and
promotional expenses. General and administrative expenses increased 42% to
approximately $305,000 in the 1998 Quarter from approximately $215,000 in the
1997 Quarter. The majority of this increase resulted from increased outside
legal and accounting services, investor relation expenses, and other
expenses related to being a public company, most of which were not applicable
in the 1997 Quarter. The Company anticipates a charge of approximately $1.1
million in the Third Quarter of 1998 due to the issuance of stock and options
to its financial public relations advisor. (See Note 8 to the Financial
Statements)
Other Income (Expense). Other (Expense) decreased to approximately
$(6,000) in the 1998 Quarter from approximately $(163,000) in the 1997
Quarter. This decrease is primarily due to the reduction in interest expense,
resulting from the repayment of the Bridge Financing from proceeds of the
Company's initial public offering (the "IPO") in May 1997. See Note 4 to the
Company's audited financial statements contained in its Annual Report on Form
10-KSB.
<PAGE>
Extraordinary Item - Loss on Extinquishment of Debt. This loss was
realized in the 1997 Quarter as a result of the repayment of the Bridge
Financing from proceeds of the Company's IPO.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $(510,408), or $(.13) per share, in the 1998 Quarter
compared to a net loss of $(883,925) or $(.33) per share, in the 1997
Quarter. Weighted Average Shares Outstanding were 3,899,212 in the 1998
Quarter compared to 2,709,212 in the 1997 Quarter. The Company expects to
continue to generate losses until such time, if any, as it achieves
significantly higher sales levels.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net Sales. Net Sales increased 75% to approximately $877,000 for the
six months ended June 30, 1998 (the "1998 First Half") from approximately
$500,000 for the six months ended June 30, 1997 (the "1997 First Half").
This increase in net sales was due primarily to unit sales growth from
approximately 69,000 cases in the 1997 First Half to approximately 133,000
cases in the 1998 First Half. The average sales price per case decreased
approximately 9% in the 1998 First Half compared to the 1997 First Half due
to discounts and promotional allowances granted to promote sales. Sales in
the Hawaiian market accounted for approximately 66% of sales in the 1998
First Half compared to 69% in the 1997 First Half. Sales to the US Mainland
and International markets accounted for approximately 15% and 19% of sales,
respectively, in the 1998 First Half compared to 18% and 13% of sales,
respectively, in the 1997 First Half.
Cost of Sales. The Company's cost of sales increased 47% to
approximately $800,000 in the 1998 First Half from approximately $543,000 in
the 1997 First Half, primarily due to unit sales growth. However, the
average cost per case sold decreased approximately 23% in the 1998 First
Half.
Gross Margin. Gross margin increased to approximately $77,000 in the
1998 First Half from approximately ($43,000) in the 1997 First Half,
primarily as a result of reductions in the Company's cost of bottles and
improvements to its bottling line.
Expenses. Selling and marketing expenses increased 86% to approximately
$512,000 in the 1998 First Half from approximately $276,000 in the 1997 First
Half. The majority of this increase is attributable to an expanded sales
staff and promotional expenses. General and Administrative expenses increased
66% to approximately $616,000 in the 1998 First Half from approximately
$370,000 in the 1997 First Half. The majority of this increase resulted from
increased outside legal and accounting expenses, investor relation expenses,
and other expenses related to being a public company, most of which were not
applicable in the First Half of 1997.
Other Income (Expense). Other (Expense) decreased to approximately
$(3,000) in the 1998 First Half from approximately $(398,000) in the 1997
First Half. This decrease is primarily due to the reduction in interest
expense, resulting from the repayment of the Bridge Financing in May 1997.
Net Loss and Net Loss Per Share. Due to the foregoing, the Company
incurred a net loss of $(1,054,467) or $(.27) per share, in the 1998 First
Half compared to a net loss of $(1,355,873) or $(.63) per share, in the 1997
First Half. Weighted Average Shares Outstanding were 3,899,212 in the 1998
First Half compared to 2,154,212 in the 1997 First Half.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents declined from approximately $2,471,000 at
December 31, 1997 to approximately $1,109,000 at June 30, 1998, primarily
due to continuing losses from operations, capital expenditures and debt
repayment.
In connection with the purchase of its bottling equipment in September
1997, the Company issued to the seller a promissory note in the original
principal amount of $825,000. This note is payable in monthly installments of
$13,750 (including principal and interest) during the first two years
following the issuance thereof, and thereafter in three annual installments
of $165,000, plus interest at the annual rate of 5% on the unpaid principal
and balance.
The Company had capital expenditures of approximately $62,000 in the
1998 Quarter, compared to approximately $5,900 in the 1997 Quarter, primarily
related to improvements to its bottling facility. Capital expenditures of
approximately $90,000 previously expected during the second quarter of 1998,
to complete the automation of the Company's bottling line and refurbish the
pumping equipment at its water source, were deferred. The Company is
currently considering extending its product line by entering the home/office
market, either independently or through the acquisition of an existing
bottler. Any such extension would require substantial additional capital.
Based upon current expectations, the Company does not believe that cash
on hand will be adequate to fund its operations until such time as the
Company is able to generate positive cash flow from operations. Therefore,
the Company will need to raise additional capital or improve its performance
more rapidly than expected in order to sustain its operations. Additional
capital would also be required in connection with the possible acquisition of
other businesses or assets. The Company is currently negotiating with certain
sources concerning the investment of additional capital. Additional capital
may also become available through the exercise of options by the Company's
financial public relations advisor. (See Note 8 to the Financial Statements)
However, there can be no assurance that such capital will become available on
acceptable terms or that any of such options will be exercised. The Company
does not anticipate obtaining bank financing at this time.
SEASONALITY
The Company believes that its business is subject to seasonal
variations. For obvious reasons, demand for bottled water in any given market
tends to be higher during the summer months than during the winter. However,
the Company expects these seasonal effects to be moderated by concurrent sales
into a variety of different markets worldwide, all of which may not have the
same summer season. Moreover, several of the Company's target markets, such as
California and the Middle East, have hot or mild temperatures throughout the
year.
CURRENCY FLUCTUATIONS
The Company is not directly affected by currency fluctuations in
overseas markets, since all of the Company's sales are quoted in U.S. dollars.
However, currency fluctuations can adversely affect the demand for the Company's
product in foreign markets by increasing the price of the product in local
currency. To date, the Company has not been prevented from expanding
distribution into target Asian markets as a result of the strength of the U.S.
dollar relative to local currencies. However, futher strengthening of the U.S.
dollar could negatively impact developments in these markets.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1998 Annual Meeting of Stockholders (the "Annual
Meeting") on June 2, 1998.
(b) The following three persons were re-elected as directors of the Company:
Marcus Bender
Brian Barbata
Michael Chagami
Subsequent to the mailing of the Company's Definitive Proxy
Statement for the Annual Meeting, John Mayo, an incumbent director, resigned
as a director for personal reasons and withdrew his nomination for
re-election at the Annual Meeting. No other person was nominated for election
in his stead. Accordingly, the Board seat previously occupied by Mr. Mayo
remained vacant following the Annual Meeting.
(c) The following matters were voted upon at the Annual Meeting:
(1) Election of Directors:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Marcus Bender 3,534,225 20,020 --
Brian Barbata 3,533,275 20,970 --
Michael Chagami 3,534,225 20,020 --
</TABLE>
(2) Approval of the 1998 Stock Option Plan providing for the grant
of options covering up to 1,000,000 shares of Common Stock (including 502,034
shares covered by options then outstanding):
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
<S> <C> <C> <C>
1,653,715 82,545 10,100 1,807,885
</TABLE>
(3) Ratification of Arthur Andersen LLP as the Company's
independent accountants for the fiscal year ending December 31, 1998:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
3,536,195 14,975 3,075
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
10.1 1998 Stock Option Plan (including exhibits thereto)
27.1 Financial Data Schedule
99.1 Letter agreement dated July 31, 1998 between the Registrant
and 8607 Colonial Group, Inc.
</TABLE>
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HAWAIIAN NATURAL WATER COMPANY, INC.
(Registrant)
August 12, 1998 By: /S/ MARCUS BENDER
----------------------
Marcus Bender
President & Chief Executive Officer
August 12, 1998 By: /S/ DAVID K. LAEHA
-----------------------
David K. Laeha
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
10.1 1998 Stock Option Plan (including exhibits thereto)
27.1 Financial Data Schedule
99.1 Letter agreement dated July 31, 1998 between the Registrant
and 8607 Colonial Group, Inc.
</TABLE>
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
1998 STOCK OPTION PLAN
I. PURPOSE
The purpose of the Plan is to promote the interests of Hawaiian Natural
Water Company, Inc. ("Company"), its stockholders and its subsidiaries, by
encouraging certain present and future officers and key employees, directors and
independent contractors of the Company and its subsidiaries, to purchase shares
of common stock (no par value) of the Company ("Common Stock"), and to increase
their personal and proprietary interest in the success of the Company, and to
act as an incentive to continue their employment or association with the Company
or its subsidiaries. It is further intended that options issued pursuant to this
Plan shall constitute incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or shall
constitute non-qualified stock options as described in Treasury Regulation
Section 1.83-7 to which Section 421 does not apply.
II. ADMINISTRATION
2.1 Except as otherwise provided in Section 2.2 below, the Plan shall be
administered by the Company's Board of Directors ("Board"). The Board shall meet
at such times and places as it determines and may meet through telephone
conference call. A majority of its members shall constitute a quorum, and the
decision of the majority of those present at any meeting at which a quorum is
present shall constitute the decision of the Board. Except as otherwise provided
in Section 2.2 below, the Board shall have the sole power to grant options
pursuant to the Plan, including the determination of the persons to whom options
shall be granted, the times when they shall receive them, the option price of
each option, and the number of shares to be subject to each option.
2.2 Notwithstanding any provision of this Plan to the contrary, the
determination of an option grant to any "covered employee", within the meaning
of Section 162(m)(3) of the Code, and the terms and conditions of such option
shall be made exclusively by a committee, comprised of two or more "non-employee
directors" (as defined under Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended ("1934 Act")) of the Company ("Committee"). The
Board may also delegate its authority under the Plan to this Committee; except
that option grants to members of the Committee shall be made and administered
exclusively by the Board. Only non-employee directors who qualify as "outside
directors", within the meaning of Treasury Regulation Section 1.162(e)(3), shall
be eligible to serve on the Committee. The Committee may, from time to time, at
its sole discretion, remove members from, or add members to, the Committee.
Vacancies on the Committee, however caused, shall be filled by the Board. The
Committee shall select one of its members as Chairman, and shall hold meetings
at such time and place as it determines advisable. A majority of the Committee
shall constitute the quorum; and the acts of a majority of the members present
at any meeting, or acts reduced to and approved in writing by a majority of the
Committee, shall be valid acts of the Committee.
2.3 Incentive stock options granted pursuant to the Plan are intended to be
"incentive stock options" within the meaning of Section 422 of the Code, and the
interpretation by the Committee of any provision of the Plan or of any incentive
stock option agreement entered into hereunder shall be in accordance with
Section 422 of the Code and Regulations issued thereunder as such Section or
Regulations may be amended from time to time, in order that the rights granted
hereunder and under said option agreement shall constitute "incentive stock
options" within the meaning of such Section. Non-qualified options granted
pursuant to the Plan are intended to be non-qualified stock options described in
Treasury Regulation Section 1.83-7 to which Section 421 of the Code does not
apply, and the interpretation by the Board (or Committee, if applicable) of any
provision of the Plan or of any non-qualified stock option agreement entered
into hereunder shall be in accordance with Treasury Regulation Section 1.83-7 as
such Regulation may be amended from time to time, in order that the rights
granted hereunder and under said
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<PAGE>
option agreement shall constitute "non-qualified stock options" within the
meaning of such Regulation. The Board (or Committee, if applicable) shall have
the sole authority and power, subject to the express provisions and limitations
of the Plan, to construe the Plan and option agreements granted thereunder, and
to adopt, prescribe, amend, and rescind rules and regulations relating to the
Plan, and to make all determinations necessary or advisable for administering
the Plan. The interpretation and construction by the Board (or Committee, if
applicable) of any provisions of the Plan or of any option granted thereunder
shall be final and conclusive. No member of the Board or the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any option granted thereunder.
2.4 All options granted under the Plan shall be evidenced by written option
agreements signed by an officer of the Company and the person receiving the
option. Subject to the requirement that incentive stock options only be granted
to employees of the Company, an optionee may be granted incentive stock options
or non-qualified stock options or both under the Plan; provided, however, that
the grant of incentive stock options and non-qualified stock options to an
optionee shall be the grant of separate options and each incentive stock option
and each non-qualified stock option shall be specifically designated as such in
accordance with the applicable provisions of the Treasury Regulations.
III. ELIGIBLE PARTICIPANTS
3.1 Excepting members of the Committee, if applicable, all directors,
officers and other executive, managerial, and other key employees of the Company
or its subsidiary corporations, as such term is defined in Section 424(f) of the
Code ("subsidiary corporations or subsidiaries") shall be eligible to
participate under the Plan with respect to both incentive stock options and
non-qualified stock options, and all independent contractors rendering services
to the Company or its subsidiaries shall be eligible to participate under the
Plan with respect to non-qualified stock options only; provided, however, that
no director of the Company or its subsidiaries shall be eligible to receive an
incentive stock option unless, in addition to being a director, he/she is an
employee of the Company or its subsidiaries in a class eligible to receive
incentive stock options.
3.2 An individual may hold more than one option, and may be granted
additional options from time to time, as the Board (or Committee, if applicable)
may determine, but only on the terms and subject to the restrictions herein set
forth. No person shall be eligible to receive an incentive stock option under
the Plan if he directly or indirectly owns (within the meaning of Section
422(b)(6) of the Code) stock possessing more than 10% of the total combined
voting power or value of all classes of stock of the Company or of its parent or
any of its subsidiaries. This limitation shall not apply if at the time such
incentive stock option is granted the option price is at least 110% of the fair
market value of the stock subject to the option and such option by its terms is
not exercisable after the expiration of five years from the date such option is
granted.
VI. SHARES SUBJECT TO THE PLAN
4.1 Shares subject to the options will be shares of the Company's
authorized but unissued Common Stock, or treasury shares reacquired by the
Company or any combination thereof.
4.2 The aggregate number of shares of Common Stock of the Company which may
be issued or delivered upon the exercise of all incentive stock options and
non-qualified stock options granted under the Plan shall not exceed 1,000,000
shares, subject to adjustment as provided in Article VI hereof; provided that
the Board (or Committee, if applicable) may not grant to any individual options
to purchase more than 250,000 shares of Common Stock. The foregoing limits on
the aggregate number of shares that may be reserved for issuance to all
participants under the Plan or to any one individual upon exercise of options
granted under the Plan shall be inclusive of the total number of shares reserved
by the Company pursuant to the terms of any outstanding and unexercised
non-qualified stock option previously granted by the Company prior to the
effective date of the Plan. In the event any option granted under the Plan shall
A-2
<PAGE>
expire, terminate or be surrendered without having been exercised in full, the
shares of Common Stock for which such option or unexercised portion thereof were
granted shall be available again for future grant of options pursuant to the
Plan.
V. TERMS AND CONDITIONS OF OPTIONS
5.1 Each option shall state the number of shares of Common Stock to which
it pertains, and shall state the option price, which price, in the case of an
incentive stock option, shall not be less than 100%, and in the case of a
non-qualified stock option not less than 50%, of the fair market value of such
shares on the date on which the option was granted. Subject to Section 5.2
below, the Board (or Committee, if applicable) shall exercise its best judgment
in good faith in fixing the option price, shall have full authority and
discretion to do so, and shall be fully protected in so doing. The option price
shall be payable in United States dollars upon exercise of the option, and may
be in cash, check or Common Stock of the Company, or in such other manner as
determined by the Board (or Committee, if applicable) in order to facilitate the
exercise of the option, including, but not limited to, a cashless exercise of
the option, subject to applicable securities law restrictions and the
requirements of Regulation T promulgated by the Federal Reserve Board; except
that in the case of any participant subject to Section 16(b) of the 1934 Act,
such cashless exercise of his/her option may not occur within six months of the
date of grant of such option, to the extent such exercise during such six-month
period would not be exempted from Section 16(b) of the 1934 Act by virtue of
Rule 16b-3 promulgated thereunder. In the sole discretion of the Board, the
Company may assist any employee to whom an option is granted hereunder
(including any director or officer of the Company or any of its subsidiaries) in
the payment of the option price by lending the amount of such option price to
such employee on such terms and at such rate of interest and upon such security
as determined by the Board.
5.2 The fair market value per share of Common Stock shall be determined by
the Board in accordance with the following provisions:
A. If the Common Stock is at the time listed or admitted to trading on
any national stock exchange, then the fair market value shall be the closing
selling price per share on the date in question on the exchange determined
by the Committee to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Common Stock on such exchange on
the date in question, then the fair market value shall be the closing
selling price on the exchange on the last preceding date for which such
quotation exists.
B. If the Common Stock is not at the time listed or admitted to trading
on any national stock exchange but is traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), the fair market
value shall be the closing selling price per share on the date in question,
as such price is reported by the National Association of Securities Dealers
through NASDAQ or any successor system. If there is no reported closing
selling price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of fair market value.
C. If the Common Stock is not at the time listed or admitted to trading
on any national stock exchange and is not traded on NASDAQ, the fair market
value on the date in question shall be determined in good faith by the
Board.
5.3 Notwithstanding Section 5.1, the aggregate fair market value (determined
as of the time each respective incentive stock option is granted) of the stock
with respect to which incentive stock options are exercisable for the first time
by any optionee during any calendar year (under all plans of the Company and its
parent and subsidiary corporations) shall not exceed the sum of $100,000.
A-3
<PAGE>
5.4 The period of time within which an option may be exercised shall be
determined in each case by the Board (or Committee, if applicable), but in the
case of an incentive stock option shall in no event exceed ten years from the
date of grant, at which time any unexercised option shall expire. Each option
shall be exercisable in such installments, which need not be equal, upon such
contingencies as the Board (or Committee, if applicable) shall determine;
provided, however, that if an optionee shall not in any given installment period
purchase all the shares which such optionee is entitled to purchase in such
installment period, such optionee's right to purchase any shares not purchased
in such installment period shall continue until expiration of such option. The
Board (or Committee, if applicable) may at its discretion, subsequent to the
grant of any option, accelerate the date on which any or all of the installments
may become exercisable. No option may be exercised for a fraction of a share,
but a cash payment in lieu of a fractional share may be made if appropriate in
the event that options for fractional shares are created pursuant to any
adjustment made under Article VI below.
5.5 Except as provided in Section 5.6 below, an optionee may not exercise
his/her incentive stock option unless he/she has been in the employ of the
Company or one of its subsidiaries continuously during the period beginning on
the date of the granting of the incentive stock option and ending on the day
three months before the date of such exercise. Continuous employment shall not
be deemed to be interrupted by transfers between subsidiaries or between parent
and subsidiary, whether or not effected by termination from one entity or rehire
by another. All employment with the Company and all subsidiaries shall be
totaled and considered as one employment for purposes of this Plan, provided
there is no such interval between employments, as, in the opinion of the Board
(or Committee, if applicable), shall be deemed to break continuity of service.
The Board (or Committee, if applicable) shall in its discretion determine the
effect of approved leaves of absence and all other matters affecting "continuous
employment".
5.6 In the case of an incentive stock option, if the optionee shall die
while employed by the Company or any of its subsidiaries or during the
subsequent period not exceeding three months under the circumstances referred to
in Section 5.5 above, the option may be exercised at any time during the
remainder of the option term (as provided in the optionee's option agreement) by
his/her personal representatives or persons to whom his/her rights under the
option shall pass by will or the laws of descent and distribution. The option
may be exercised only as to those shares of Common Stock with respect to which
installments had accrued as of the date of death, or if death occurs within the
three month period subsequent to termination of employment or association, then
only as to those shares with respect to which installments had accrued as of the
date of such termination. The Board (or Committee, if applicable) may, in its
discretion, provide in an option agreement that all or any unexercisable
installments shall become exercisable on the date of death of an optionee, so
that such installments may be exercised pursuant to this Section 5.6 even though
they would not otherwise have been exercisable had the optionee not died. No
transfer of an option by the employee by will or by the laws of descent and
distribution shall be effective, nor shall any designation of a person who may
exercise the option after the optionee's death be effective, to bind the Company
unless the Company shall have been furnished with written notice thereof and a
copy of the will and/or such other evidence as the Board (or Committee, if
applicable) may deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees or designee of the terms and
conditions of the option.
5.7 With respect to each non-qualified stock option, the Board (or
Committee, if applicable) shall determine the period of time, if any, within
which the option may be exercised following the optionee's death, termination of
employment or cessation of service.
5.8 No option granted under this Plan shall be transferable otherwise than
by will (and in accordance with Sections 5.6 and 5.7 hereof) or the laws of
descent and distribution and an option may be exercised, during the lifetime of
the optionee, only by him/her.
5.9 Subject to the terms and conditions and within the limitations of the
Plan, the Board (or Committee, if applicable) may modify, extend or renew
outstanding options granted under the Plan, or
A-4
<PAGE>
accept the surrender of outstanding options (to the extent not theretofore
exercised) and authorize the granting of new options in substitution therefor
(to the extent not theretofore exercised). The Board (or Committee, if
applicable) shall not, however, modify any outstanding incentive stock options
so as to specify a lower price or accept the surrender of outstanding options
and authorize the granting of new options in substitution therefor specifying a
lower price. Notwithstanding the foregoing, no modification of an option shall,
without the consent of the optionee, alter or impair any rights or obligations
under any option theretofore granted under the Plan, and any modification which
constitutes a "modification" within the meaning of Section 424(h) of the Code
shall be null and void unless it specifically states that it constitutes a
modification within the meaning of that Section.
5.10 The option agreements authorized under the Plan shall contain such
other provisions, including, without limitation, restrictions upon the exercise
of the option, as the Board (or Committee, if applicable) shall deem advisable.
Any incentive stock option agreement shall contain such limitations and
restrictions upon the exercise of the option as shall be necessary in order that
such option will be an "incentive stock option" as defined in Section 422 of the
Code, or to conform to any change in the law. At the time of exercise of any
option, the Board (or Committee, if applicable) may require the holder of such
option to execute any documents or take any actions that may be then necessary
to comply with the Securities Act of 1933 and the rules and regulations adopted
thereunder, and any other applicable federal or state laws for the purpose of
regulating the sale and issuance of securities, and the Board (or Committee, if
applicable) may, if it deems necessary, include provisions in the stock option
agreements to ensure such compliance. The Company may, from time to time, change
its requirements with respect to enforcing compliance with federal and state
securities laws including the request for and enforcement of letters of
investment intent, such requirements all to be determined by the Company in its
judgment as necessary to ensure compliance with said laws. Such changes may be
made, with respect to any particular option or shares of Common Stock issued
upon exercise thereof, prior to or after the exercise of such option. No shares
shall be issued and delivered upon the exercise of an option unless such
issuance, in the judgment of the Committee, is in full compliance with all
applicable laws, governmental rules and regulations and undertakings of the
Company made under the Securities Act of 1933 and stock exchange agreements of
the Company.
5.11 As a condition to the exercise, in whole or in part, of any option, the
Board (or Committee, if applicable) may in its sole discretion require the
optionee to pay, in addition to the purchase price of the shares of Common Stock
covered by the option, an amount equal to any federal, state and local taxes
that may be required to be withheld in connection with the exercise of such
option or the transfer of Common Stock pursuant to such exercise.
5.12 Directors and officers who fall within the definition of "officer"
under Rule 16a-1(f) promulgated under the 1934 Act shall deliver to the
Corporate Secretary of the Company an executed notice of his/her intention to
sell shares of Common Stock acquired upon exercise, in whole or in part, of an
option granted under the Plan. Such notice, in which there is specified the
number of shares which are to be sold and the date such shares were acquired,
shall be provided at least one full business day in advance of the proposed date
of sale.
VI. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
6.1 The aggregate number and class of shares as to which options may be
granted under the Plan, the number and class of shares subject to each
outstanding option, the price per share thereof (but not the total price), and
the minimum number of shares as to which an option may be exercised at any one
time, shall all be proportionately adjusted in the event of any change or
increase or decrease in the number of the issued shares of Common Stock, without
receipt of consideration by the Company, which results from a split-up or
consolidation of shares, payment of a stock dividend, a recapitalization, a
combination of shares or other like capital adjustment, so that upon exercise of
the option the optionee shall receive the number and class of shares he/she
would have received had he/she been the holder of the number of Common
A-5
<PAGE>
Shares for which the option is being exercised immediately before the effective
date of such change or increase or decrease in the number of issued shares of
Common Stock.
6.2 Subject to any required action by its stockholders, if the Company shall
be the surviving corporation in any reorganization, merger or consolidation, the
aggregate number and class of shares on which options may be granted under the
Plan, together with each outstanding option, shall be proportionately adjusted
so as to apply to the securities to which the holder of the number of shares of
stock of the Company subject to the Plan or to any outstanding option would have
been entitled.
6.3 In the event of a change in the stock of the Company as presently
constituted, which is limited to a change of all of its authorized shares with
par value into the same number of shares with a different par value or without
par value, or to a change of all of its authorized shares without par value into
the same number of shares with a par value, the shares resulting from any such
change shall be deemed to be the stock of the Company within the meaning of the
Plan.
6.4 To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustment shall be made by the Board (or
Committee, if applicable), whose determination in that respect shall be final,
binding and conclusive, provided that each incentive stock option granted
pursuant to this Plan shall not be adjusted in a manner that causes the
incentive stock option to fail to continue to qualify as an incentive stock
option within the meaning of Section 422 of the Code. No fractional shares of
stock shall be issued under the Plan on account of any such adjustment.
6.5 The grant of an option pursuant to the Plan shall not affect in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
VII. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
7.1 In the event of any Corporate Transaction or Change in Control, each
option which is at the time outstanding under this Plan shall automatically
accelerate so that each option shall, immediately prior to the specified
effective date for the Corporate Transaction or Change in Control, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares. Further, in connection with the Corporate Transaction, each such option
shall either be (i) assumed by the successor corporation or parent thereof or
replaced with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, or (ii) replaced with a right, upon
exercise of which the optionee shall be entitled to receive solely a like amount
and kind of securities, cash and/or property receivable upon such Corporate
Transaction as the optionee would have been entitled to receive if the option,
to the extent not previously exercised, had been exercised in full immediately
prior to such Corporate Transaction.
7.2 For purposes of this Article VII, a "Change in Control" means a change
in ownership or control of the Company effected through either of the following
transactions:
(A) any person, or more than one person acting as a group (within the
meaning of Rule 13d-3 and/or 14d-2 of the 1934 Act), other than the Company
or a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company, directly or indirectly acquires, in
a transaction or series of transactions, beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
50% of the total combined voting power of the Company's outstanding
securities; or
(B) there is a change in the composition of the Board over a period of
twelve consecutive months such that a majority of the Board members (rounded
up to the next whole number) ceases to be comprised of individuals who
either (1) have been Board members continuously since the beginning of such
period or (2) have been elected or nominated for election as Board members
during such period
A-6
<PAGE>
by at least a majority of the Board members described in clause (1) who were
still in office at the time such election or nomination was approved by the
Board.
7.3 For purposes of Article VII, a "Corporate Transaction" means any of the
following stockholder-approved transactions to which the Company is a party:
(A) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change
the State in which the Company is incorporated.
(B) the sale, transfer or other disposition of all or substantially all
of the assets of the Company in complete liquidation or dissolution of the
Company, or
(C) any reverse merger in which the Company is the surviving entity but
in which securities possessing more than 50% of the total combined voting
power of the Company's outstanding securities are transferred to a person or
persons different from those who held such securities immediately prior to
such merger.
7.4 Each outstanding option under this Plan which is assumed in connection
with the Corporate Transaction or is otherwise to continue in effect shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
and pertain to the number and class of securities which would have been issued
to the option holder, in consummation of such Corporate Transaction, had such
person exercised the option immediately prior to such Corporate Transaction.
Appropriate adjustments shall be also be made to the option price payable per
share, provided the aggregate option price payable for such securities shall
remain the same. In addition, the class and number of securities available for
issuance under the Plan following the consummation of the Corporate Transaction
shall be appropriately adjusted.
7.5 The grant of replacement or comparable options pursuant to this Article
VII shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
7.6 Any options accelerated in connection with the Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.
7.7 Any incentive stock options accelerated pursuant to this Article VII in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as incentive stock options under the Federal tax laws only to the
extent the applicable dollar limitation of Section 5.3 is not exceeded. To the
extent such dollar limitation is exceeded, the accelerated option shall be
exercisable as a non-qualified stock option under the Federal tax laws.
VIII. INDEMNIFICATION OF BOARD (OR COMMITTEE, IF APPLICABLE)
In addition to such other rights of indemnification as they may have as
members of the Board (or Committee, if applicable), the members of the Board (or
Committee, if applicable) shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding except in relation to matters as of which
it shall be adjudged in such action, suit or proceeding that such Board (or
Committee, if applicable) member is liable for negligence or misconduct in the
performance of his duties; provided that within 60 days after institution of any
such action, suit or proceeding a Committee member shall in writing offer the
Company the opportunity, at its own expense, to handle and defend the same.
A-7
<PAGE>
IX. TERMINATION AND AMENDMENT OF THE PLAN
9.1 The term during which options may be granted under this Plan shall
expire on April 30, 2008.
9.2 The Board may, insofar as permitted by law, from time to time, with
respect to any shares at the time not subject to options, suspend or discontinue
the Plan or revise or amend it in any respect whatsoever except that, without
approval of the stockholders (to the extent required by Section 162(m) of the
Code, Section 16 of the 1934 Act and the rules promulgated thereunder and any
national securities exchange or national market system on which the shares of
Common Stock are then listed, included or reported), no such revision or
amendment shall (a) change the designation of the class of employees and/ or
independent contractors eligible to receive incentive stock options, (b)
increase the total number of shares for which incentive stock options may be
granted under the Plan, (c) extend the term of the Plan or the maximum option
period thereunder, (d) materially increase the benefits accruing to optionees
under the Plan, or (e) decrease the minimum option price or permit or make
reduction of the price at which shares may be purchased under any option granted
under the Plan, except as provided in Article VI above. No termination or
amendment to this Plan may, without the consent of an optionee, terminate his
option or materially or adversely affect his rights under any outstanding
options.
X. APPLICATION OF FUNDS
The proceeds received by the Company from the sale of Common Stock pursuant
to options will be used for general corporate purposes.
XI. APPROVAL OF STOCKHOLDERS
This Plan is effective as of the date of adoption by the Board of Directors
(or the date the Plan received stockholder approval, if earlier) but is subject
to the approval of the holders of a majority of the outstanding shares of the
stock of the Company, which approval must occur no later than one year after the
date of the adoption of this Plan by the Company's Board of Directors.
Date Plan Adopted by Board of Directors: April 30, 1998
Date Plan Approved by Stockholders: June 2, 1998
A-8
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following stock option grant (the "Option") to
purchase shares of the Common Stock of Hawaiian Natural Water Company, Inc. (the
"Company"):
<TABLE>
<S> <C>
Optionee:
------------------------
Grant Date:
------------------------
Grant Number:
------------------------
Option Price: $ -------------- per share
Number of Option Shares:
------------------ shares
Expiration Date:
------------------------
(for incentive stock options, no later than ten years from the Grant Date (five years
in the case of an incentive stock option granted to a 10% or more stockholder)
Type of Option:
---- Incentive Stock Option
---- Non-Qualified Option
</TABLE>
Exercise Schedule: The Option shall become exercisable
---------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Post-Service or-Employment Exercisability: If the Option is designated a
non-qualified stock option and notwithstanding any provision in Section 5 to the
contrary, the Option may be exercised following Optionee's death, termination of
employment or cessation of service as follows: _________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
B-1
<PAGE>
Optionee understands and agrees that the Option is granted subject to and in
accordance with the express terms and conditions of the Hawaiian Natural Water
Company, Inc. 1998 Stock Option Plan (the "Plan"). Optionee further agrees to be
bound by the terms and conditions of the Plan and the terms and conditions of
the Option as set forth in the Stock Option Agreement attached hereto as Exhibit
A. Optionee also acknowledges receipt of a copy of the Plan attached hereto as
Exhibit B.
No Employment or Service Contract. Nothing in this Agreement or in the Plan
shall confer upon Optionee any right to continue in Service or Employment for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Company (or any subsidiary employing Optionee) or
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service or Employment at any time for any reason whatsoever, with or
without cause.
Dated: ______________
HAWAIIAN NATURAL WATER
COMPANY, INC.
By: __________________________________
Title: _______________________________
_________________________
OPTIONEE
Address: _____________________________
________________________
________________________
Exhibit A: Stock Option Agreement
Exhibit B: Plan
B-2
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of ______________, (this "Agreement"),
is made and entered into by and between Hawaiian Natural Water Company, Inc., a
Hawaiian corporation (the "Company"), and __________________ ("Optionee").
WITNESSETH:
WHEREAS, the Company's Board of Directors (the "Board") has adopted the
Company's 1998 Stock Option Plan (the "Plan") for the purpose of attracting and
retaining the services of key employees (including officers and directors),
non-employee Board members and consultants and other independent contractors;
and
WHEREAS, Optionee is an individual who is to render valuable services to the
Company or one or more parent or subsidiary corporations, and this Agreement is
executed pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the Company's grant of a stock option to Optionee.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth
in the Plan and this Agreement, the Company hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant of
Stock Option (the "Grant Notice"), a stock option to purchase up to that number
of shares of the Company's Common Stock (the "Option Shares") as is specified in
the Grant Notice. Such Option Shares shall be purchasable from time to time
during the option term at the option price (the "Option Price") specified in the
Grant Notice.
2. OPTION TERM. This option shall expire at the close of business on the
expiration date (the "Expiration Date") specified in the Grant Notice, unless
sooner terminated in accordance with Section 5 or Section 6 hereof.
3. LIMITED TRANSFERABILITY. This option shall be exercisable only by
Optionee during Optionee's lifetime and shall not be transferable or assignable
by Optionee other than by will or by the laws of descent and distribution
following Optionee's death.
4. DATES OF EXERCISE. This option shall become exercisable for the Option
Shares in accordance with the installment schedule specified in the Grant
Notice. As the option becomes exercisable for one or more installments, those
installments shall accumulate, and the option shall remain exercisable for the
accumulated installments until the Expiration Date or sooner termination of the
option term under Section 5 or Section 6 of this Agreement. This option shall
not become exercisable for any additional Option Shares following Optionee's
cessation of Service.
5. CESSATION OF SERVICE OR EMPLOYMENT. The option term specified in
Section 2 hereof shall terminate (and this option shall cease to be outstanding)
prior to the Expiration Date in accordance with the following provisions:
a. This option shall immediately terminate and cease to be outstanding
for any Option Shares for which it is not exercisable at the time of
Optionee's cessation of Service or Employment.
b. Should Optionee cease Service or Employment for any reason other
than death while this option remains outstanding, then Optionee shall have a
three (3)-month period measured from the date of such cessation of Service
or Employment in which to exercise this option for any or all of the Option
Shares for which this option is exercisable at the time of such cessation of
Service or Employment. In no event, however, may this option be exercised at
any time after the specified
C-1
<PAGE>
Expiration Date of the option term. Upon the expiration of such three
(3)-month period or (if earlier) upon the specified Expiration Date of the
option term, this option shall terminate and cease to be outstanding.
c. Should Optionee die while in Service or Employment or within the
three (3)-month period following his or her cessation of Service or
Employment, then the personal representative of Optionee's estate or the
person or persons to whom this option is transferred pursuant to Optionee's
will or in accordance with the laws of descent and distribution shall have
the right to exercise the option for any or all of the Option Shares for
which this option is exercisable at the time of Optionee's cessation of
Service or Employment, less any Option Shares subsequently purchased by
Optionee prior to death. Such right shall lapse, and this option shall
terminate and cease to remain outstanding, upon the Expiration Date.
d. During the limited period of post-Service or -Employment
exercisability applicable pursuant to subsections (b) and (c) above, this
option may not be exercised in the aggregate for more than the number of
Option Shares (if any) for which this option is, at the time of the
Optionee's cessation of Service or Employment, exercisable in accordance
with either the normal exercise provisions specified in the Grant Notice or
the special acceleration provisions of Section 6 of this Agreement.
e. For purposes of this Agreement, the following definitional
provisions shall be in effect:
(1) Optionee shall be deemed to remain in Service for so long as such
individual renders services on a full-time basis to the Company (or any
parent or subsidiary) in the capacity of an Employee.
(2) Optionee shall be considered to remain in Employment for so long
as such individual remains in the employ of the (Company or any parent or
subsidiary), subject to the control and direction of the employer entity
not only as to the work to be performed but also as to the manner and
method of performance.
(3) A corporation shall be considered to be a subsidiary of the
Company if it is a member of an unbroken chain of corporations beginning
with the Company, provided each such corporation in the chain (other than
the last corporation) owns, at the time of determination, stock
possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
(4) A corporation shall be considered to be a parent of the Company
if it is a member of an unbroken chain ending with the Company, provided
each such corporation in the chain (other than the Company) owns, at the
time of determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the
other corporations in such chain.
6. CORPORATE TRANSACTION/CHANGE IN CONTROL.
a. In the event of any Corporate Transaction or Change in Control, this
option shall automatically accelerate so that it shall, immediately prior to
the specified effective date for the Corporate Transaction or Change in
Control, become fully exercisable with respect to the total number of Option
Shares at the time subject to the option and may be exercised for all or any
portion of such shares. Further, in connection with the Corporate
Transaction, this option shall either be (i) assumed by the successor
corporation or parent thereof or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, or (ii) replaced with a right, upon exercise of which, the Optionee
shall be entitled to receive solely a like amount and kind of securities,
cash and/or property receivable upon such Corporate Transaction as the
Optionee would have been entitled to receive if the option, to the extent
not previously exercised, had been exercised in full immediately prior to
such Corporate Transaction.
C-2
<PAGE>
b. For purposes of this Section 6, a "Change in Control" means a change
in ownership or control of the Company effected through either of the
following transactions:
(1) any person, or more than one person acting as a group (within the
meaning of Rule 13d-3 and/or 14d-2 of the 1934 Act), other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company, directly or indirectly
acquires, in a transaction or series of transactions, beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities; or
(2) there is a change in the composition of the Board over a period
of twelve (12) consecutive months such that a majority of the Board
members (rounded up to the next whole number) ceases to be comprised of
individuals who either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at the
time such election or nomination was approved by the Board.
c. For purposes of this Section 6, a "Corporate Transaction" means any
of the following stockholder-approved transactions to which the Company is a
party:
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated.
(2) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in complete liquidation or dissolution
of the Company, or
(3) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
d. The option, to the extent it is assumed in connection with the
Corporate Transaction or is otherwise to continue in effect, shall be
appropriately adjusted, immediately after such Corporate Transaction, to
apply and pertain to the number and class of securities which would have
been issued to the option holder, in consummation of such Corporate
Transaction, had such person exercised the option immediately prior to such
Corporate Transaction. Appropriate adjustments shall be also be made to the
option price payable per share, provided the aggregate option price payable
for such securities shall remain the same. In addition, the class and number
of securities available for issuance under the Plan following the
consummation of the Corporate Transaction shall be appropriately adjusted.
e. The grant of a replacement or comparable option pursuant to this
Section 6 shall in no way affect the right of the Company to adjust,
reclassify, reorganize or otherwise change its capital or business structure
or to merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its business or assets.
f. The option, to the extent it is accelerated in connection with the
Change in Control, shall remain fully exercisable until the expiration or
sooner termination of the option term.
g. Any incentive stock option accelerated pursuant to this Section 6 in
connection with a Corporate Transaction or Change in Control shall remain
exercisable as an incentive stock option under the Federal tax laws only to
the extent the applicable dollar limitation of subsection 10b is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
option shall be exercisable as a non-qualified stock option under the
Federal tax laws.
C-3
<PAGE>
7. ADJUSTMENT IN OPTION SHARES.
In the event any change is made to the Common Stock issuable under the Plan
by reason of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class effected without the Company's receipt of consideration, the
Board (or Plan Committee, if applicable) shall make appropriate adjustments to
(1) the number and/or class of securities subject to this option and (2) the
Option Price payable per share in order to prevent any dilution or enlargement
of benefits hereunder. Such adjustments shall be final, binding and conclusive.
8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have
any of the rights of a stockholder with respect to the Option Shares until such
individual shall have exercised this option and paid the Option Price for the
purchased Option Shares.
9. MANNER OF EXERCISING OPTION.
a. In order to exercise this option with respect to all or any part of
the Option Shares for which this option is at the time exercisable, Optionee
(or in the case of exercise after Optionee's death, Optionee's executor,
administrator, heir or legatee, as the case may be) must take the following
actions:
(1) Deliver to the Corporate Secretary of the Company an executed
notice of exercise in substantially the form of EXHIBIT I to this
Agreement (the "Exercise Notice"), in which there is specified the number
of Option Shares which are to be purchased under the exercised option.
(2) Pay the aggregate Option Price for the purchased shares through
one or more of the following alternatives:
(A) full payment in cash or by check payable to the Company's
order;
(B) full payment in shares of Common Stock valued at Fair Market
Value on the Exercise Date (as such term is defined below);
(C) full payment in a combination of shares of Common Stock
valued at Fair Market Value on the Exercise Date and cash or check
payable to the Company's order; or
(D) in such other manner as determined and approved by the Board
(or Committee, if applicable) in order to facilitate the exercise of
the option.
(3) Furnish to the Company appropriate documentation that the person
or persons exercising the option (if other than Optionee) have the right
to exercise this option.
b. For purposes of this Agreement, the Exercise Date shall be the date
on which the executed Exercise Notice shall have been delivered to the
Company. Except to the extent the sale and remittance procedure specified
above is utilized in connection with the option exercise, payment of the
Option Price for the purchased shares must accompany such Exercise Notice.
For all valuation purposes under this Agreement, the Fair Market Value per
share of Common Stock on any relevant date shall be determined by the Board
(or Committee, if applicable) in accordance with the following provisions:
(1) If the Common Stock is at the time listed or admitted to trading
on any national stock exchange, then the Fair Market Value shall be the
closing selling price per share on the date in question on the exchange
determined by the Board (or Committee, if applicable) to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no reported
sale of Common Stock on such exchange on the date in question, then the
Fair Market Value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
C-4
<PAGE>
(2) If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
the Fair Market Value shall be the closing selling price per share on the
date in question, as such price is reported by the National Association
of Securities Dealers through NASDAQ or any successor system. If there is
no reported closing selling price for the Common Stock on the date in
question, then the closing selling price on the last preceding date for
which such quotation exists shall be determinative of Fair Market Value.
(3) If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange and is not traded on NASDAQ, but
there is a public market for the Common Stock, then the Fair Market Value
on the date in question shall be the average of the last reported bid and
asked prices of the Common Stock on the date in question as determined by
the Board (or Committee, if applicable). If there is no reported bid and
asked prices of the Common Stock on the date in question, then the Fair
Market Value shall be the average of the last reported bid and asked
prices of the Common Stock on the last preceding date for which such
quotation exists as determined by the Board (or Committee, if
applicable).
(4) If there is no public market for the Common Stock, then the Fair
Market Value on the date in question shall be determined in good faith by
the Board (or Committee, if applicable).
c. As soon as practical after receipt of the Exercise Notice, the
Company shall mail or deliver to or on behalf of Optionee (or any other
person or persons exercising this option in accordance herewith) a
certificate or certificates representing the purchased Option Shares.
d. In no event shall this option be exercised for any fractional
shares.
10. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event
this option is designated an incentive stock option in the Grant Notice, the
following terms and conditions shall also apply to the grant:
a. This option shall cease to qualify for favorable tax treatment as an
incentive stock option under the Federal tax laws if (and to the extent)
this option is exercised for one or more Option Shares: (i) more than three
(3) months after the date Optionee ceases to be an Employee for any reason
other than death.
b. If this option is to become exercisable in a series of installments
as indicated in the Grant Notice, no such installment shall qualify for
favorable tax treatment as an incentive stock option under the Federal tax
laws if (and to the extent) the aggregate Fair Market Value (determined at
the Grant Date) of the Company's Common Stock for which such installment
first becomes exercisable hereunder will, when added to the aggregate fair
market value (determined as of the respective date or dates of grant) of the
Common Stock or other securities for which this option or one or more other
incentive stock options granted to Optionee prior to the Grant Date (whether
under the Plan or any other option plan of the Company or any parent or
subsidiary), first become exercisable during the same calendar year, exceed
One Hundred Thousand Dollars ($100,000) in the aggregate. Should the number
of shares of Common Stock for which this option first becomes exercisable in
any calendar year exceed the applicable One Hundred Thousand Dollar
($100,000) limitation, this option may nevertheless be exercised for those
excess shares in such calendar year as a non-qualified option.
c. Should the exercisability of this option be accelerated upon a
Corporate Transaction in accordance with Section 6 hereof, then this option
shall qualify for favorable tax treatment as an incentive stock option under
the Federal tax laws only to the extent the aggregate Fair Market Value
(determined at the Grant Date) of the Company's Common Stock for which this
option first becomes exercisable in the calendar year in which the Corporate
Transaction occurs does not, when added to the aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock
or other securities for which this option or one or more other incentive
stock options
C-5
<PAGE>
granted to Optionee prior to the Grant Date (whether under the Plan or any
other option plan of the Company or any parent or subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. Should the number of shares of Common
Stock for which this option first becomes exercisable in the calendar year
of such Corporate Transaction exceed the applicable One Hundred Thousand
Dollar ($100,000) limitation, the option may nevertheless be exercised for
the excess shares in such calendar year as a non-qualified option.
d. Should the Optionee hold, in addition to this option, one or more
other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as incentive stock options
under the Federal tax laws shall be applied on the basis of the order in
which such options are granted.
e. Notwithstanding the designation of this option as an incentive stock
option in the Grant Notice, this option shall not qualify as an incentive
under the Federal tax laws if the Optionee directly or indirectly owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power or value of all
classes of stock of the Company or its parent corporation or any of its
subsidiary corporations, unless the Option Price is at least one hundred ten
percent (110%) of the Fair Market Value per share of Common Stock subject to
this option on the Grant Date and the Expiration Date is no later than five
(5) years after the Grant Date.
f. To the extent this option should fail to qualify as an incentive
stock option under the Federal tax laws, Optionee will recognize
compensation income in connection with the acquisition of one or more Option
Shares hereunder, and Optionee must make appropriate arrangements for the
satisfaction of all Federal, state or local income and employment tax
withholding requirements applicable to such compensation income.
11. ADDITIONAL TERMS APPLICABLE TO A NON-QUALIFIED STOCK OPTION. In the
event this option is designated a non-qualified stock option in the Grant
Notice, Optionee shall make appropriate arrangements with the Company (or any
parent or subsidiary employing Optionee) for the satisfaction of all Federal,
state or local income tax and employment tax withholding requirements applicable
to the exercise of this option.
12. GOVERNING LAW. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of Hawaii without
resort to that state's conflict-of-laws rules.
13. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this option and
the issuance of Option Shares upon such exercise shall be subject to compliance
by the Company and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange on which
shares of the Company's Common Stock may be listed at the time of such exercise
and issuance.
14. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Section 3 or Section 6 hereof, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the successors, administrators, heirs and
legal representatives of Optionee and the successors and assigns of the Company.
15. LIABILITY OF COMPANY. The inability of the Company to obtain approval
from any regulatory body having authority deemed by the Company to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Company of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Company shall, however, use its best efforts to obtain all such approvals.
16. NO EMPLOYMENT/SERVICE CONTRACT. Nothing in this Agreement or in the
Plan shall confer upon Optionee any right to continue in the Service or
Employment of the Company (or any parent or subsidiary employing or retaining
Optionee) for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Company (or any such parent or subsidiary)
or Optionee, which rights are
C-6
<PAGE>
hereby expressly reserved by each party, to terminate Optionee's Service or
Employment at any time for any reason whatsoever, with or without cause.
17. NOTICES. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to the
Company in care of the Corporate Secretary at the Company's principal offices at
248 Mokauea Street, Honolulu, Hawaii 96819. Any notice required to be given or
delivered to Optionee shall be in writing and addressed to Optionee at the
address indicated on the Grant Notice. All notices shall be deemed to have been
given or delivered upon personal delivery or upon deposit in the U.S. mail, by
registered or certified mail, postage prepaid and properly addressed to the
party to be notified.
18. CONSTRUCTION. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan. All capitalized terms not
otherwise defined herein shall have the respective meanings ascribed to them in
the Plan. All decisions of the Board (or Committee, if applicable) with respect
to any question or issue arising under the Plan or this Agreement shall be
conclusive and binding on all persons having an interest in this option.
HAWAIIAN NATURAL WATER
COMPANY, INC.
--------------------------------------
By:
--------------------------------------
Title:
-------------------------------------------------------------------------------
C-7
<PAGE>
EXHIBIT I
NOTICE OF EXERCISE OF OPTION
I hereby notify Hawaiian Natural Water Company, Inc. (the "Company") that I
elect to purchase ______ shares of the Company's Common Stock (the "Purchased
Shares") at the option exercise price of $______ per share (the "Option Price")
pursuant to that certain option (the "Option") granted to me under the Company's
1998 Stock Option Plan on ______.
Concurrently with the delivery of this Notice of Exercise of Option to the
Corporate Secretary of the Company, I shall hereby pay to the Company the Option
Price for the Purchased Shares in accordance with the provisions of my agreement
with the Company evidencing the Option (the "Agreement"), and shall deliver
whatever additional documents may be required by the Agreement as a condition
for exercise.
<TABLE>
<S> <C>
Date: , 199 OPTIONEE
-------------------------------------------
-------------------------------------------
Address: ----------------------------------
-------------------------------------------
Print name in exact manner it is to appear
on the stock certificate:
-------------------------------------------
Address to which certificate is to be sent,
if different from address above: -------------------------------------------
-------------------------------------------
Social Security Number:
-------------------------------------------
Employee Number:
-------------------------------------------
</TABLE>
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<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NOTICE OF GRANT OF NON-QUALIFIED STOCK OPTION
Notice is hereby given of the following stock option grant (the "Option") to
purchase shares of the Common Stock of Hawaiian Natural Water Company, Inc. (the
"Company"):
<TABLE>
<S> <C>
Optionee:
------------------------
Grant Date:
------------------------
Grant Number:
------------------------
Option Price: $ -------------- per share
Number of Option Shares:
------------------ shares
Expiration Date:
------------------------
</TABLE>
Exercise Schedule: The Option shall become exercisable
---------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
Optionee understands and agrees that the Option is granted subject to and in
accordance with the express terms and conditions of the Hawaiian Natural Water
Company, Inc. 1998 Stock Option Plan (the "Plan"). Optionee further agrees to be
bound by the terms and conditions of the Plan and the terms and conditions of
the Option as set forth in the Stock Option Agreement attached hereto as Exhibit
A. Optionee also acknowledges receipt of a copy of the Plan attached hereto as
Exhibit B.
D-1
<PAGE>
No Employment or Service Contract. Nothing in this Agreement or in the Plan
shall confer upon Optionee any right to continue in Service or Employment for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Company (or any subsidiary employing Optionee) or
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service or Employment at any time for any reason whatsoever, with or
without cause.
Dated: ______________
HAWAIIAN NATURAL WATER
COMPANY, INC.
By: __________________________________
Title: _______________________________
_________________________
OPTIONEE
Address: _____________________________
________________________
________________________
Exhibit A: Stock Option Agreement
Exhibit B: Plan
D-2
<PAGE>
HAWAIIAN NATURAL WATER COMPANY, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of __________, (this "Agreement"), is
made and entered into by and between Hawaiian Natural Water Company, Inc., a
Hawaiian corporation (the "Company"), and ____________ ("Optionee").
WITNESSETH:
WHEREAS, the Company's Board of Directors (the "Board") has adopted the
Company's 1998 Stock Option Plan (the "Plan") for the purpose of attracting and
retaining the services of key employees (including officers and directors),
non-employee Board members and consultants and other independent contractors;
and
WHEREAS, Optionee is an individual who is to render valuable services to the
Company or one or more parent or subsidiary corporations, and this Agreement is
executed pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the Company's grant of a stock option to Optionee.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth
in the Plan and this Agreement, the Company hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant of
Stock Option (the "Grant Notice"), a stock option to purchase up to that number
of shares of the Company's Common Stock (the "Option Shares") as is specified in
the Grant Notice. Such Option Shares shall be purchasable from time to time
during the option term at the option price (the "Option Price") specified in the
Grant Notice.
2. OPTION TERM. This option shall expire at the close of business on the
expiration date (the "Expiration Date") specified in the Grant Notice, unless
sooner terminated in accordance with Section 5 or Section 6 hereof.
3. LIMITED TRANSFERABILITY. This option shall be exercisable only by
Optionee during Optionee's lifetime and shall not be transferable or assignable
by Optionee other than by will or by the laws of descent and distribution
following Optionee's death.
4. DATES OF EXERCISE. This option shall become exercisable for the Option
Shares in accordance with the installment schedule specified in the Grant
Notice. As the option becomes exercisable for one or more installments, those
installments shall accumulate, and the option shall remain exercisable for the
accumulated installments until the Expiration Date.
5. CORPORATE TRANSACTION/CHANGE IN CONTROL.
a. In the event of any Corporate Transaction or Change in Control, this
option shall automatically accelerate so that it shall, immediately prior to
the specified effective date for the Corporate Transaction or Change in
Control, become fully exercisable with respect to the total number of Option
Shares at the time subject to the option and may be exercised for all or any
portion of such shares. Further, in connection with the Corporate
Transaction, this option shall either be (i) assumed by the successor
corporation or parent thereof or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, or (ii) replaced with a right, upon exercise of which, the Optionee
shall be entitled to receive solely a like amount and kind of securities,
cash and/or property receivable upon such Corporate Transaction as the
Optionee would have been entitled to receive if the option, to the extent
not previously exercised, had been exercised in full immediately prior to
such Corporate Transaction.
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<PAGE>
b. For purposes of this Section 5, a "Change in Control" means a change
in ownership or control of the Company effected through either of the
following transactions:
(1) any person, or more than one person acting as a group (within the
meaning of Rule 13d-3 and/or 14d-2 of the 1934 Act), other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company, directly or indirectly
acquires, in a transaction or series of transactions, beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities; or
(2) there is a change in the composition of the Board over a period
of twelve (12) consecutive months such that a majority of the Board
members (rounded up to the next whole number) ceases to be comprised of
individuals who either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at the
time such election or nomination was approved by the Board.
c. For purposes of this Section 5, a "Corporate Transaction" means any
of the following stockholder-approved transactions to which the Company is a
party:
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated.
(2) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in complete liquidation or dissolution
of the Company, or
(3) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
d. The option, to the extent it is assumed in connection with the
Corporate Transaction or is otherwise to continue in effect, shall be
appropriately adjusted, immediately after such Corporate Transaction, to
apply and pertain to the number and class of securities which would have
been issued to the option holder, in consummation of such Corporate
Transaction, had such person exercised the option immediately prior to such
Corporate Transaction. Appropriate adjustments shall be also be made to the
option price payable per share, provided the aggregate option price payable
for such securities shall remain the same. In addition, the class and number
of securities available for issuance under the Plan following the
consummation of the Corporate Transaction shall be appropriately adjusted.
e. The grant of a replacement or comparable option pursuant to this
Section 5 shall in no way affect the right of the Company to adjust,
reclassify, reorganize or otherwise change its capital or business structure
or to merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its business or assets.
f. The option, to the extent accelerated in connection with the Change
in Control, shall remain fully exercisable until the expiration of the
option term.
6. ADJUSTMENT IN OPTION SHARES. In the event any change is made to the
Common Stock issuable under the Plan by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class effected without the
Company's receipt of consideration, the Board (or Plan Committee, if applicable)
shall make appropriate adjustments to (1) the number and/or class of securities
subject to this option and (2) the
E-2
<PAGE>
Option Price payable per share in order to prevent any dilution or enlargement
of benefits hereunder. Such adjustments shall be final, binding and conclusive.
7. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have
any of the rights of a stockholder with respect to the Option Shares until such
individual shall have exercised this option and paid the Option Price for the
purchased Option Shares.
8. MANNER OF EXERCISING OPTION.
a. In order to exercise this option with respect to all or any part of
the Option Shares for which this option is at the time exercisable, Optionee
(or in the case of exercise after Optionee's death, Optionee's executor,
administrator, heir or legatee, as the case may be) must take the following
actions:
(1) Deliver to the Corporate Secretary of the Company an executed
notice of exercise in substantially the form of EXHIBIT I to this
Agreement (the "Exercise Notice"), in which there is specified the number
of Option Shares which are to be purchased under the exercised option.
(2) Pay the aggregate Option Price for the purchased shares through
one or more of the following alternatives:
(A) full payment in cash or by check payable to the Company's
order;
(B) full payment in shares of Common Stock valued at Fair Market
Value on the Exercise Date (as such term is defined below);
(C) full payment in a combination of shares of Common Stock
valued at Fair Market Value on the Exercise Date and cash or check
payable to the Company's order; or
(D) in such other manner as determined and approved by the Board
(or Committee, if applicable) in order to facilitate the exercise of
the option.
(3) Furnish to the Company appropriate documentation that the person
or persons exercising the option (if other than Optionee) have the right
to exercise this option.
b. For purposes of this Agreement, the Exercise Date shall be the date
on which the executed Exercise Notice shall have been delivered to the
Company. Except to the extent the sale and remittance procedure specified
above is utilized in connection with the option exercise, payment of the
Option Price for the purchased shares must accompany such Exercise Notice.
For all valuation purposes under this Agreement, the Fair Market Value per
share of Common Stock on any relevant date shall be determined by the Board
(or Committee, if applicable) in accordance with the following provisions:
(1) If the Common Stock is at the time listed or admitted to trading
on any national stock exchange, then the Fair Market Value shall be the
closing selling price per share on the date in question on the exchange
determined by the Board (or Committee, if applicable) to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no reported
sale of Common Stock on such exchange on the date in question, then the
Fair Market Value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.
(2) If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
the Fair Market Value shall be the closing selling price per share on the
date in question, as such price is reported by the National Association
of Securities Dealers through NASDAQ or any successor system. If there is
no reported closing selling price
E-3
<PAGE>
for the Common Stock on the date in question, then the closing selling
price on the last preceding date for which such quotation exists shall be
determinative of Fair Market Value.
(3) If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange and is not traded on NASDAQ, but
there is a public market for the Common Stock, then the Fair Market Value
on the date in question shall be the average of the last reported bid and
asked prices of the Common Stock on the date in question as determined by
the Board (or Committee, if applicable). If there is no reported bid and
asked prices of the Common Stock on the date in question, then the Fair
Market Value shall be the average of the last reported bid and asked
prices of the Common Stock on the last preceding date for which such
quotation exists as determined by the Board (or Committee, if
applicable).
(4) If there is no public market for the Common Stock, then the Fair
Market Value on the date in question shall be determined in good faith by
the Board (or Committee, if applicable).
c. As soon as practical after receipt of the Exercise Notice, the
Company shall mail or deliver to or on behalf of Optionee (or any other
person or persons exercising this option in accordance herewith) a
certificate or certificates representing the purchased Option Shares.
d. In no event shall this option be exercised for any fractional
shares.
9. EMPLOYMENT TAX WITHHOLDING. If Optionee is an employee, Optionee shall
make appropriate arrangements with the Company (or any parent or subsidiary
employing Optionee) for the satisfaction of all Federal, state or local income
tax and employment tax withholding requirements applicable to the exercise of
this option.
10. GOVERNING LAW. The interpretation, performance, and enforcement of
this Agreement shall be governed by the laws of the State of Hawaii without
resort to that state's conflict-of-laws rules.
11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this option and
the issuance of Option Shares upon such exercise shall be subject to compliance
by the Company and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange on which
shares of the Company's Common Stock may be listed at the time of such exercise
and issuance.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Section 3 hereof, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, administrators, heirs and legal
representatives of Optionee and the successors and assigns of the Company.
13. LIABILITY OF COMPANY. The inability of the Company to obtain approval
from any regulatory body having authority deemed by the Company to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Company of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Company shall, however, use its best efforts to obtain all such approvals.
14. NO EMPLOYMENT/SERVICE CONTRACT. Nothing in this Agreement or in the
Plan shall confer upon Optionee any right to continue in the service or
employment of the Company (or any parent or subsidiary employing or retaining
Optionee) for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Company (or any such parent or subsidiary)
or Optionee, which rights are hereby expressly reserved by each party, to
terminate Optionee's service or employment at any time for any reason
whatsoever, with or without cause.
15. NOTICES. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to the
Company in care of the Corporate Secretary at the Company's principal offices at
248 Mokauea Street, Honolulu, Hawaii 96819. Any notice required to be given or
delivered to Optionee shall be in writing and addressed to Optionee at the
address indicated on the Grant Notice. All notices shall be deemed to have been
given or delivered upon personal delivery or
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<PAGE>
upon deposit in the U.S. mail, by registered or certified mail, postage prepaid
and properly addressed to the party to be notified.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan. All capitalized terms not
otherwise defined herein shall have the respective meanings ascribed to them in
the Plan. All decisions of the Board (or Committee, if applicable) with respect
to any question or issue arising under the Plan or this Agreement shall be
conclusive and binding on all persons having an interest in this option.
HAWAIIAN NATURAL WATER
COMPANY, INC.
--------------------------------------
By:
--------------------------------------
Title:
-------------------------------------------------------------------------------
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<PAGE>
EXHIBIT I
NOTICE OF EXERCISE OF OPTION
I hereby notify Hawaiian Natural Water Company, Inc. (the "Company") that I
elect to purchase ______ shares of the Company's Common Stock (the "Purchased
Shares") at the option exercise price of $______ per share (the "Option Price")
pursuant to that certain option (the "Option") granted to me under the Company's
1998 Stock Option Plan on __________.
Concurrently with the delivery of this Notice of Exercise of Option to the
Corporate Secretary of the Company, I shall hereby pay to the Company the Option
Price for the Purchased Shares in accordance with the provisions of my agreement
with the Company evidencing the Option (the "Agreement"), and shall deliver
whatever additional documents may be required by the Agreement as a condition
for exercise.
<TABLE>
<S> <C>
Date: , 199 OPTIONEE
-------------------------------------------
-------------------------------------------
Address: ----------------------------------
-------------------------------------------
Print name in exact manner it is to appear
on the stock certificate:
-------------------------------------------
Address to which certificate is to be sent,
if different from address above: -------------------------------------------
-------------------------------------------
Social Security Number:
-------------------------------------------
Employee Number:
-------------------------------------------
</TABLE>
E-6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 1,109,362 0
<SECURITIES> 0 0
<RECEIVABLES> 322,057 0
<ALLOWANCES> 10,626 0
<INVENTORY> 346,603 0
<CURRENT-ASSETS> 1,917,317 0
<PP&E> 2,182,533 0
<DEPRECIATION> 306,135 0
<TOTAL-ASSETS> 3,793,715 0
<CURRENT-LIABILITIES> 591,158 0
<BONDS> 468,815 0
0 0
0 0
<COMMON> 8,392,644 0
<OTHER-SE> (5,683,752) 0
<TOTAL-LIABILITY-AND-EQUITY> 3,793,715 0
<SALES> 876,608 477,005
<TOTAL-REVENUES> 923,457 495,744
<CGS> 800,073 407,024
<TOTAL-COSTS> 800,073 407,024
<OTHER-EXPENSES> 1,127,839 574,600
<LOSS-PROVISION> 3,402 3,402
<INTEREST-EXPENSE> 50,012 24,528
<INCOME-PRETAX> (1,054,467) (510,408)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,054,467) (510,408)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,054,467) (510,408)
<EPS-PRIMARY> (.27) (.13)
<EPS-DILUTED> (.27) (.13)
</TABLE>
<PAGE>
Exhibit 99.1
8607 Colonial Group, Inc.
601 Stage Road
Monroe, New York 10950
July 31, 1998
Marcus Bender
President and CEO
Hawaiian Natural Water Company Inc.
248 Mokauea Street
Honolulu, Hawaii 96819
Dear Mr. Bender:
This letter is intended to confirm our understanding with respect to
certain financial public relations advisory services (the "Services") that
the undersigned will render to Hawaiian Natural Water Company Inc. (the
"Company") during the two year period commencing the date hereof, and the
remuneration that the undersigned will receive in consideration therefor.
The Services to be rendered by the undersigned shall consist of acting
as a liaison between the Company and members of the securities industry and
the financial community including, without limitation, broker-dealers,
industry analysts, institutional investors, individuals of high net-worth,
and the Internet trading community, for the purpose of increasing the
visibility of the Company and its capital stock. In particular, the
undersigned shall use its diligent efforts to secure favorable coverage of
the Company and its capital stock on one or more Internet investment
newsletters. The Company acknowledges that the undersigned provides
consulting services to other clients, and further acknowledges and agrees
that the undersigned shall not be expected to render any specific number of
hours of Services. Further, the Company understands that all services to be
performed by the undersigned will be rendered by or supervised by Michael
Gaggi.
The undersigned shall not distribute to the press or financial community
any press release, analyst's report or similar information regarding the
Company without the prior written consent of the Company, which shall not be
unreasonably withheld or delayed. Further, in performing services hereunder
the undersigned shall comply with all applicable laws and regulations,
including, but not limited to those promulgated by the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc. and
its affiliates.
As remuneration for the Services, the Company shall deliver to the
undersigned promptly after the date hereof a non-refundable retainer
consisting of 100,000 shares (the "Initial Shares") of the Company's Common
Stock (the "Common Stock"), registered in the name of the undersigned. On or
before August 31, 1998, the Company will file a registration statement (the
"Registration Statement"), on SEC Form S-3, if available, to effect the
registration for sale
<PAGE>
Marcus Bender
July 31, 1998
Page 2
under the Securities Act of 1933, as amended (the "Securities Act"), of the
Initial Shares, the 565,000 shares issuable upon exercise of the options
referred to below and the 50,000 shares of Common Stock issuable upon
exercise of a portion of such options (collectively, the "Registered
Securities"). In addition, the Company shall take such steps as are
reasonably requested to keep the Registration Statement effective for a
period of twelve months and to enable the Registered Securities to be sold in
such states as the undersigned may reasonably request.
As additional consideration the Company is delivering to the undersigned
565,000 options (the "Options") to purchase Common Stock having the terms set
forth below:
<TABLE>
<CAPTION>
No. of Shares Per Share Initial
Purchasable Exercise Price Exercise Date Expiration Date
------------- -------------- ----------------- ---------------
<S> <C> <C> <C>
100,000 $2.50 September 1, 1998 August 31, 1999
100,000 $3.00 October 1, 1998 August 31, 1999
100,000 $3.50 November 15, 1998 August 31, 1999
100,000 $4.00 January 15, 1999 July 15, 2000
100,000 $5.00 March 15, 1999 July 15, 2000
65,000 $6.00 May 15, 1999 July 15, 2000
</TABLE>
In addition, if the undersigned shall exercise all of the Options which are
scheduled to expire on August 31, 1999, then in addition to the shares
underlying such Options, the undersigned shall receive an additional 50,000
shares of Common Stock.
The Options shall not be assigned or otherwise transferred without the
prior written consent of the Company. The Company shall have the right to
purchase all or any part of the Options then outstanding upon ten days notice
to the undersigned, at a price of $.05 per Option, if the last sale price or
the average of the closing bid and asked prices for the Common Stock exceeds
150% of the exercise price of the Options to be redeemed for a period of 10
consecutive trading days. During such 10 day notice period the undersigned
shall have the right to exercise the Options to be redeemed.
Notwithstanding the schedule of Expiration Dates set forth above and the
right granted to the Company in the foregoing paragraph to redeem the
Options, it is the intent of the parties that the undersigned have the right
for a period of at least thirty days to sell the Initial Shares publicly
either pursuant to an effective Registration Statement or Rule 144 prior to
the expiration of the right to exercise any Options or the onset of the
Company's right to redeem the Options. Consequently, unless the Registration
Statement contemplated above is declared effective and remains effective for
a period of at least thirty days prior to July 15, 1999, the Expiration Date
of the Options shall be extended until the date which is thirty (30) days
after
<PAGE>
Marcus Bender
July 31, 1998
Page 3
the first to occur of the effectiveness of the Registration Statement or the
receipt by the undersigned of an opinion or counsel to the Company
acknowledging the undersigned's right to sell the Initial shares pursuant to
Rule 144.
Please acknowledge that the foregoing correctly sets forth our agreement
by signing the enclosed copy of this letter agreement or a counterpart
thereof, and returning it to the undersigned, whereupon this letter agreement
shall constitute a binding agreement between us.
Very truly yours,
8607 Colonial Group, Inc.
By: /s/ Michael A. Gaggi
---------------------------------
Michael A. Gaggi
Agreed as of the date above
Hawaiian Natural Water Company, Inc.
By: /s/ Marcus Bender
----------------------------------
Marcus Bender
